Property Grunt

Sunday, April 01, 2007

What about Manhattan? Part 3: April Fool's

You're asking for it Grunt!

I am just as surprised as you all are that I am still writing about this myself since I have already done two entries which include What about Manhattan? part 1 and part 2. But when this article came up, well, I couldn’t pass it up. Just bear with me with my commentary on this article and I promise you there will a nice treat at the end of this entry.

The Battle for a Mortgage

AS homeowners across the country have dealt with the declining values of their houses and their ballooning mortgage payments, most New Yorkers seem to believe that the market here doesn’t play by the same rules.

But in recent weeks, a growing number of New Yorkers, often with six-figure salaries and reasonably good credit, have begun to find that mortgages are harder to get as lenders try to stem losses from loans to the weakest, or subprime, borrowers.
While mortgage brokers insist that most buyers in New York can still close deals, they also warn that people with any red flags on their mortgage applications will face delays and will pay higher fees. Potential problems include low credit scores or high credit-card balances or listing a suspiciously high salary for a given job.
“You’re going to pay the piper for any little mistake,” said Melissa Cohn, the president of Manhattan Mortgage Inc. She said her brokers — who last year arranged more than $3 billion in mortgages, mainly in New York City — were spending twice as much time on each application as they did a month ago because of new lending requirements, and she expects the situation only to get worse.

There appears to be some type of consequence from the sub prime meltdown. It appears that Manhattan is not as invulnerable as everyone thought.

“The impact is going to be much greater as banks demand that people have clean credit to get the best mortgages,” she said.
Buyers like Lee and Kimberly Au had to adjust their expectations. The Aus wanted to buy a one- or two-bedroom condominium costing $800,000 to $1.25 million at the Atelier on West 42nd Street, now that their 8-year-old son has a modeling contract in New York. But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment.
Eric Eisenberg, the mortgage broker handling the deal, said that even though the Aus put up more cash, the transaction was far more difficult to close than it once would have been.
“About three weeks ago, I would have gotten this done by snapping my fingers,” said Mr. Eisenberg, who is the executive vice president of the EFI Capital Corporation, a mortgage brokerage based in Garden City, N.Y. “Now it’s a very lengthy and time-consuming process where every bit of paperwork has to be done to the T. The guidelines are literally changing every hour.”

Dr. Au is a surgeon in Hawaii. Do you know how rich you have to be to live in Hawaii? Yet even the lenders weren’t impressed with his qualifications.

Until recently, many New Yorkers found it fairly easy to get mortgages. Then banks that made loans to subprime borrowers started running into trouble when the borrowers found it impossible to pay their mortgages and fell into foreclosure. As a result, banks have cut back on all types of loans.

Nationally, indicators show that the real estate market is in turmoil. A report issued on March 23 by the National Association of Realtors said that existing home sales in February 2007 jumped 3.9 percent from the month before but were 3.6 percent lower than the same month the year before. A report issued on March 26 by the Commerce Department said that new home sales in February dropped by 18.3 percent from the year before, to a seven-year low.

In any case, lenders who are experiencing an increase in foreclosures are tightening standards on mortgages across the board.
“Lenders are going to scrutinize borrowers more carefully” in the next six to nine months, said Doug Duncan, the chief economist at the Mortgage Bankers Association in Washington. He added, “The pendulum is probably going to swing too far in the other direction before it settles.”
That means more New Yorkers are already having to provide more documents to get approvals for all types of mortgages. For example, some brokers who used to get loans approved by lenders without proof of assets from divorces now require the actual decrees. Other mortgage lenders are requiring W-2 forms or pay stubs that they didn’t ask for before.

In other words, lenders are requiring a full body cavity search on the finances of the borrowers.

Credit scores typically measure a number of factors, from how promptly borrowers pay their bills to how much credit-card debt they have. The rankings range from 300 to 850. David Strause, a private mortgage banker with Countrywide Financial in New York, said that prime borrowers who can negotiate the best rates typically have scores of 700 or more. Borrowers in the “Alt-A” category have mid-tier credit levels, with scores between 620 and 680. Subprime borrowers have scores below 620.
Ms. Cohn of Manhattan Mortgage said that six months ago she could negotiate mortgages at good rates for borrowers with credit scores of more than 660. That score now has shifted to 700 “to open any doors,” she said.

In many cases, economists say, borrowers are going to be treated like subprime and Alt-A borrowers for what would seem to be fairly common mistakes, like not paying a few bills on time or carrying a lot of debt.

They do not want to take any more chances. The party is over and a lot of people are discovered to be deadbeats now that the check is due.

“One of the myths is that subprime is a province of the poor,” said Mr. Duncan of the Mortgage Bankers Association. “Subprime is a province of people who don’t manage credit well,” regardless of their incomes.

Tom Acitelli has presented a very strong case that there is no sub prime presence in Manhattan but not to be a wet blanket, I still would not be surprised to see a sub prime presence pop up in Manhattan. Remember these words.

“Subprime is a province of people who don’t manage credit well,” regardless of their incomes.

When I first started out doing rentals, I had a client who I thought was a slam dunk. She was an executive at a well known company and had a great salary. I found a place she loved and we put the application in.

The next day the management company called and told me to keep her the hell away from their buildings. It turned out her credit was beyond atrocious. From this experience I learned that you don’t have to be poor to have bad credit. There are plenty of rich people who can’t qualify to get a cell phone without a co-signer.

The Aus recently found that their credit scores had slipped into these lower categories. Dr. Au, who has four surgical offices in Hawaii, saw his score dip to a subprime level after he and a relative invested in a project, which Ms. Au would not discuss. She said the relative had missed some payments.

See what I mean?

Corey Miller, a technical designer of men’s and women’s outerwear who makes about $140,000, counting his salary and rental income, bought a three-family house in 2005 in Crown Heights, Brooklyn, with a friend for $525,000.

At the time, he and his friend were able to get 100 percent financing for the property because Mr. Miller had a credit score of more than 720. After spending nearly $50,000 on renovations — new floors, kitchens and cabinets — he signed leases on his two apartments that brought in about $3,000 in monthly income. He and his friend live in the third unit. He then had the property reappraised and found out that its value had risen to $750,000.

But the $25,000 he charged to five credit cards for the renovation work lowered his credit score to 690, and his prospects for refinancing were diminished. When he tried to refinance the building, applying for a 30-year mortgage for $550,000 at an interest rate of 6.25 percent, his application was rejected.
His broker, Joe Levy, the president of Middlegate Mortgage in Manhattan, said that Mr. Miller had too much debt on his credit cards and because his was a three-family property, he was applying for an unconventional mortgage.

So Mr. Miller, who recently received a large tax refund, paid down his credit-card balance to about $15,000. Now he carries a lower ratio of overall debt to available credit. He plans to reapply for a new mortgage when his credit score is updated this month.
“We’re playing the waiting game until April 15,” he said. “Then we’re going to resubmit.”

As soon as I read the words “But the $25,000 he charged to five credit cards for the renovation work..” I realized this guy was in for some turbulence. Limit your credit cards to the essentials, folks. Credit card debt is not tax deductible and it should never be considered on the same level as cash. Will Mr. Miller be able to get out of this? Maybe, maybe not, it depends on how far the lenders will look back on his financial history.

Last April, Dan Simonette, a labor and employment lawyer, took out a $200,000 second mortgage on his home in Prospect Heights. He wanted to renovate the first floor to make it accessible for his 75-year-old mother, Noreen, who is blind.
His credit score had dipped to about 500 because of bills incurred in a divorce and the cost of hiring a home attendant for his mother. At the time, Mr. Simonette, who makes more than $100,000 a year, got a second mortgage with an 11.75 percent interest rate from the Emigrant Savings Bank.

By December, he had improved his credit score slightly and tried to refinance at more than a dozen banks. Early last month, he finally was able to get a 6.8 percent interest rate with Fremont General, a subprime lender based in Santa Monica, Calif. But the day the loan was supposed to close, Fremont said it was selling its subprime business. Mr. Simonette’s mortgage ended up being one of the last loans that Fremont executives approved.

He said that based on his experience, borrowers can expect the application process to take more time than normal. “It was harder to get answers,” he said. “It was harder to get a return call.”

This guy is a lawyer. A f**king lawyer. A lawyer never goes hungry in Manhattan because they are always needed. And even he is having trouble getting financing.

Remember this quote from Tom’s article?
In short, in Manhattan, sub prime mortgages aren’t common because they can’t be common. The system’s evolved to one favoring those with good credit or a lot of liquid money.

In my last entry, I stated that having either good credit or lots of liquidity may not be enough with the changing state of the Manhattan market. Below is an example of that condition becoming a reality.

Since Labor Day, Ellen Kapit, an agent with Sotheby’s International Realty in Manhattan, has been trying to sell her two-bedroom co-op in Midtown for $1.375 million so that she can buy a smaller apartment in her building. She has also been trying to sell a house she owns in Southampton for $875,000.
She found a $995,000 house in Sag Harbor that she thought might be easier to rent out when she wasn’t in residence. She wanted to get a 90 percent mortgage until she sold her apartment or the Southampton house, or both. She didn’t expect any difficulties, because she has an excellent credit score in the mid-700s and annual income of more than $100,000 a year.

Her mortgage broker, Lenny Holler, a senior loan officer at Preferred Empire Mortgage in Manhattan, suggested that she take out a “cross-collateralized loan,” which means that it would include both Hamptons houses and that the lender could foreclose on both if there were any problems.

But the lenders wanted to charge more than they would have even a few months ago. Ms. Kapit was to pay about 7.5 percent in interest on the mortgage for the new house and 10.25 percent on a $500,000 bridge loan, plus two percentage points as a closing fee. The points translate to $10,000, meaning her closing costs would total of $29,000.
Ms. Kapit finally backed out of the deal for the Sag Harbor house until she sells her apartment or her Southampton house.
“Maybe at that time I won’t need to borrow as much,” she said.

Ladies and Gentlemen, I would like to introduce you to the Punisher.

It is already too expensive to buy in Manhattan as it is but when you dump this aggravation on top of the process, then there will be some buyers who may feel they are being needlessly being penalized for the mistakes of others. They might act like Ms. Kapit and simply withdraw till the next cycle starts. And if this movement begins to snowball, well, we know the end of that movie.

What is ironic to me is that it was always assumed that rising interest rates would be the Punisher of the real estate market. But it appears now that it is the mortgage industry itself that is creating this dramatic shift in the financial climate.

Those of you who still think I am off target, I recommend you read Jonathan Miller’s blog. He has two great entries on sub prime mortgages and the effect it is having on the market. He was actually the first person I heard that stated the consequences the sub prime crisis was going to have on the rest of the mortgage industry.

Subprime Locations: No One Is Safe

Required Reading: Primer on Subprime - Its About Credit Tightening And Fed Cuts

I know it is rather depressing. But hopefully this picture of the Knicks Dancer will assuage your worries. Look at the beautiful dancing girls.